partnership accounting
TRANSCRIPT
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Characteristics of Partnership 2 – 20 owners Governed by the Partnership Ordinance A partnership agreement can be drawn up to
define the rights and obligations of the partners. If no agreement, the Partnership Ordinance applies
A partnership has no separate legal identity except for the limited partners
A limited partnership may also be formed, which means that at least one unlimited partner
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Partnership Agreement Not all partnership have agreements. However, a written partnership
agreement will help prevent problems and solve dispute between the partners
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Terms of agreement Amount of capital to be contributed by each
partners Ratio in which profits and loss to be shared
between partners Rate of interest, if any to be allowed on
partners’ capital Rate of interest, if any, to be charged on
partners’ drawings Rate of interest, if any, to be allowed on
partners’ loans to firm Salaries to be paid to the partners
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In the absence of partnership agreement, the Partnership Ordinance applies which states:
1. All partners may contribute capital equally2. Profits and losses are to be share by
partners equally3. No interest is to be paid on capital4. No interest is to be charged on partners’
drawings5. Partners are entitled to interest of 5% per
annum on loans to the firm6. No salaries are allowed to partners
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Features of Partnership Accounts
Profit and Loss Appropriation Account It is drawn under the trading and profit and
loss account It shows the distribution of profits among
the partners Capital Accounts
These accounts record the amount of capital by each partners
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Current Accounts As the partnership makes profit/loss, and the
partners take the firm’s resources for private uses, there will be fluctuation in the partners’ capital balances. A current account is set up to maintain constant capital balances of the partners as stated in the agreement.
Current account is to record: Share of profit /loss Interest on capital Interest on drawings Interest on loans Drawings Partners’ salaries
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Accounting TreatmentItems Accounting Entries
Capital contributed in cash Dr. Cash Cr. Partners’ Capital Accounts
Share of profits Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts
Share of losses Dr. Partners’ Current Accounts Cr. Profit and Loss Appropriation
Interest on capital Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts
Partners’ salaries Dr. Profit and Loss Appropriation Cr. Partners’ Current Account
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Items Accounting entries
Interest on partners’ loan Dr Profit and loss appropriationCr Partners’ current
Partners’ drawings Dr Partners’ current Cr Partners Drawings
Interest on drawings Dr Partners’ currentCr Profit and loss appropriation
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Peter and JohnProfit and Loss Appropriation Account for the year ended 31 December 1997
Partners’ Salaries
Peter XJohn X X
Net Profit b/f X
Interest on DrawingsPeter X
John X XInterest on Capital
Peter X
John X XShare of Profit
Peter X
John X X
X X
T- Form
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Peter and JohnTrading and Profit and Loss Account for the year ended 31 December 1997
Net Profit XAdd: Interest on Drawings
Peter XJohn (%*drawings) X X
Less: Partners’ SalariesPeter XJohn X X
Interest on CapitalPeter XJohn (%* capital) X X
Share of ProfitPeter (1/2) XJohn (1/2) X X
Sales XLess: Cost of goods sold
Opening stock XAdd: Purchases XLess: Closing stock X X
Gross profit XLess: Expenses
Rent XLighting X X
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Capital accountPeter John Peter John
Bal b/f X X
Current accountPeter John Peter John
Bal b/f XShare of profit X XInterest on capital X XPartners’ salaries X XBal c/f X X X
Bal b/f XInterest on drawings X XDrawings X XBal c/f X
X X
Debit balance
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Peter and John Balance Sheet as at 31 Dec 1997Fixed assets Cost Dep. NetBuildings X X XFurniture X X X X X XCurrent assets
Stock XDebtors XBank X
XLess: Current liabilities
Creditors XWorking capital X XFinanced by:Capital – Peter X
- John X X
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Current account Peter John TotalOpening balance X (X)add: Share of profit X X Partners’ salaries X X Interest on capital X X
X XLess: Drawings X X Interest on drawings X X
X X XX
Long term liabilities15% Loan X
X
Debit balance
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Tom and David are in partnership, sharing profits and losses equally. TheFollowing is their trial balance as at 31 December 1997.
Dr CrFixed assets 400000Provision for depreciation 40000Stock as at 1 Jan 1997 10000Sales 290000Purchases 150000Expenses 30000Capital – Tom 197000 - David 197000Current – Tom 8000
- David 2000Drawings – Tom 5000
- David 5000Debtors 70000Bank 8000010% Loan from Tom 20000
752000 752000
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Additional information:1. Stock in hand as at 31 December has been
valued at cost at $300002. Depreciation is to be provided at 10% per
annum on the straight line bases3. Pat interest on capital at 1% and charge
interest on drawings at 5%4. Partners’ salaries are $10000 to Tom and
$5000 to David
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Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Opening Stock 10,000Purchases 150,000
160,000
Less: Closing Stock 30,000Cost of Goods Sold 130,000
Gross Profit 160,000290,000
Expenses 30,000Depreciation 40,000Interest on Loan (20,000 X 10%) 2,000Net Profit 88,000
Sales 290,000
Gross Profit 160,000
160,000 160,000
290,000
Example 1
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Tom and David
Trading and Profit and Loss Account for the year ended 31 December 1997
Partners’ Salaries Tom 10,000
Interest on Capital Tom 1,970
David 1,970 3,940
Net Profit 88,000
David 5,000 15,000
Share of Profit Tom (1/2) 34,780 David (1/2) 34,780 69,560
Interest on Drawings Tom 250
David 250 500
88,500 88,500
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Tom and David
1997
Current Account
Tom David 1997 Tom David
Jan 1 Bal. b/f 2,000
Dec31 P&L Appropriation-Int. on Drawings 250 250
31 Drawings 5,000 5,000 31 Bal. c/f 51,500 34,500
Jan 1 Bal. b/f 8,000
Dec 31 Profit and Loss Appropriation
- Int. on Capital 1,970 1,970- Profits 34,780 34,780- Salaries 10,000 5,000
31 Profit and Loss
- Int. on Loan 2,00056,750 41,750 56,750 41,750
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Tom and David
Fixed Assets 400,000Less: Provision for Dep. 80,000
Current AssetsStock 30,000
Debtors 70,000
Capital Accounts
Tom 197,000 David 197,000 394,000
Current Accounts
Balance Sheet as at 31 December 1997
320,000
Bank 80,000 180,000
Tom 51,500
David 34,500 86,000Long-term LiabilitiesLoan from Tom 20,000
500,000 500,000
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Net profit 88,000
Interest on Drawings 500
88,500 Partners’ salary Tom 10,000
David 5,000
Interest on capital Tom 1,970
David 1,970 18,940
69,560
Share of profit Tom 34,780
David 34,780 69,560
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Minimum Share of Profits Sometime, one of the partners is
guaranteed a minimum profit. If the amount of profits shared according to the normal profit-sharing ratio is smaller than the minimum share, that partner will get his/her minimum share first, while the balance of the profits is to be shared between the other partners
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Paul, Betty and Rose are in partnership sharing profits in the ratio of 5:3:2. Rose is guaranteed a minimum share of profits of $10000.
Profits for the years ended31 Dec 1996 $20000031 Dec 1997 $42000
RequiredCalculate the share of profits to each partnerfor 1996 and 1997 are:
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Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit: Paul (5/10) 100,000
Net Profit 200,000
Betty (3/10) 60,000
Rose (2/10) 40,000 200,000200,000 200,000
Paul, Betty and Rose
Profit and Loss Appropriation Account for the year ended 31 December 1997
Share of Profit: Paul (5/10 X 32,000) 20,000
Net Profit 42,000
Betty (3/10 X 32,000) 12,000
Rose (guaranteed) 10,000 42,000 42,000 42,000